ASB jumps before Vanguard clean screen offer

Robin Bowerman: Vanguard Australia head of marketing and communication

Vanguard’s just-announced ethically-scrubbed global shares fund has arrived too late to retain one of its largest NZ institutional clients.

In a statement, ASB said as at October 11 this year it would “no longer hold securities in companies that manufacture cluster munitions, landmines or nuclear weapons”.

“This is the result of a change in international equity underlying fund manager, from Vanguard to BlackRock,” the ASB statement says. “… ASB’s previously announced review of our approach to responsible investing continues. We expect this to be completed by the end of the year.”

ASB manages about $10 billion of retail money including more than $6 billion in its KiwiSaver scheme, the country’s single largest. According to the latest ASB documents, the KiwiSaver scheme had about $1.1 billion invested in global equities while the bank’s range of ‘Easy Funds’ contributed a further $300 million or so to the international shares fund.

Despite the loss of ASB, at least two of Vanguard’s NZ clients – Booster (formerly Grosvenor) and start-up KiwiSaver firm Simplicity, have committed to switching to the new cleansed Vanguard product announced last week.

According to the product release information, the planned ‘Vanguard International Shares Select Exclusions Index Fund’ would fall 23 companies short of the previous benchmark, holding 1,541 stocks compared to the 1,564 securities in the comparable fund currently managed to the MSCI World ex Australia index.

As well as stripping out the handful of companies caught in the cluster munitions KiwiSaver furore this August, the new Vanguard global equities product – to be released by early December at the latest – would also exclude nuclear weapons-associated firms and tobacco manufacturers.

The new fund would be managed to a benchmark specified by Vanguard, the MSCI World ex Australia ex Tobacco ex Controversial Weapons ex Nuclear Weapons Index.

Robin Bowerman, Vanguard Australia head of market strategy and communications, said the fund had been designed to appeal to both Australian and New Zealand investors.

“Tobacco is a common theme for Australian investors,” Bowerman said. “And from a New Zealand perspective it’s important the product builds scale over the long-term, which will allow fees to reduce.”

He said the NZ dollar hedged version of the new fund would cost 26 basis points, compared to the current 0.31 per cent management fee for the existing Vanguard fund (charged at 18 basis points to Australian investors).

“We’re also going to lower the fee for the existing [$NZ-hedged] fund down to 24 basis points,” Bowerman said.

In the wake of media coverage highlighting a potential breach of NZ cluster munitions law in several KiwiSaver funds exposed to passive global equities investments, a number of providers petitioned Vanguard to offer a screened product.

Bowerman, in NZ last week for discussions with clients, said the push from KiwiSaver funds hastened a process that was already underway at Vanguard.

“We had been working on [screened] product ideas for a while and were looking to launch something next year,” he said. “The concerns from NZ KiwiSaver providers accelerated that development.”

According to Bowerman, most of Vanguard’s NZ clients have been upbeat about the new screened fund.

“[NZ clients] will make their own decisions about whether to transition to the new fund,” he said. “But we’ve received a lot of positive feedback.”

Bowerman said Vanguard would work with providers to ensure a smooth transition process.

Vanguard was the passive global shares provider of choice for four of the default funds – Kiwi Wealth, Westpac, Booster (formerly Grosvenor) and previously, ASB – with the latter have the biggest exposure by far. The largest KiwiSaver provider, ANZ, uses a BlackRock passive fund for international equities in its $1 billion default product.

Both Booster and Simplicity have committed to using the new Vanguard product, to the tune of $400 million in the case of the former.

In a statement last week, Booster chief investment officer, David Beattie, said: “There are a few administrative things to get lined up, but we are aiming to do this switch near the end of November or early December”.

The Vanguard International Shares Select Exclusions Index Fund – currently going through legal sign-off procedures – would overlap the standard ex Australia product by just over 97 per cent with a slightly higher P/E ratio (up 0.12) while trimming almost US$1 trillion off the market cap.

Collectively, tobacco firms represent the most significant exclusion from the new product with the largest of these, Phillip Morris, constituting 0.48 per cent of the MSCI ex Australia index.

As well as the cluster-implicated firms – General Dynamics and Textron – aircraft manufacturers Boeing (0.25 per cent of the index) and Airbus (0.11 per cent) would also be excluded from the new Vanguard fund.

Bowerman said despite the exclusions, the new product still offer NZ investors exposure to a broadly-diversified, low-cost portfolio of international shares.

According to the Vanguard release, the International Shares Select Exclusions Index Fund would have an expected tracking error of about 0.2 per cent from the MSCI World ex Australia index.